Dear Pomelo, when do my options turn into shares?
By James Woolner
Feb 28 2022
Do options just magically become shares?! - Like magic?! Omg how exciting!!
I hate to be the bearer of bad news but it's not that simple (sad face). But do not fear (neutral face), we are here in our next entry in the Dear Pomelo series to tell you everything you need to know about how to do the magical conversion process from options to shares (happy face!). Shall we get cracking?
First, the basics. Options and shares are different. Say what? We have a full blog on it here. Want a quick 101? Shares are sections of ownership in a company. This means you have what are called shareholder rights. These rights allow you to share in the profits of the company through dividends (or similar). But as a shareholder you also benefit from the appreciation of the share price. What makes a share price appreciate? Good question, and one for outside of this article (but coming soon!). In a small company this is usually paired to achieving your company's objectives. Are you a new neobank? Then having more users will most likely increase your share price (but also maybe not!). But generally, as a shareholder if the share price increases you get the benefit of the difference in the price you got the shares and what the current share price is. Basically, you can sell your shares for more than you bought them for and get the difference. Options, though, are different. They are the right, but not the obligation, to buy shares in the future at a price set today. That means you lock in a price now, and then get to wait and see what the share price does before you decide what to do - because it's a right, not an obligation. How good is that? You get all the benefits of being a shareholder, but do not have to make the decision now.
But that means you have options, not shares. Thus, no magic. But we still want shares! So how do we convert our options to shares? There are three things you need to consider about this process. Let's get to them.
First, your options have to be vested. What does vesting mean? Instead of just getting all your options in one large lump sum, instead they are given to you over time. As an example, you could be given 100 options per month for four years. This four year period is called the vesting period of your options. You will sign an agreement which states how many options you will get, and then the period they will vest over. What's the clinch? Unvested options cannot be converted into shares. If you leave the company before they are vested, you will lose the options. Therefore to get the maximum amount of shares, you need to get to the end of your vesting period. Do not know where you are in your vesting schedule? That's annoying I agree - we are developing a tool to help you out with this currently. Drop us an email to express your interest in being a part of the beta launch!
So, you have a bunch of vested options, now we need to exercise them. Sometimes this can be called striking your options - and no this has nothing to do with bowling. Exercise your options means paying the price you agreed to when you signed your contract. Hopefully by now your company is well advanced from when you signed the agreement, and therefore the share price is higher than your strike price. How do I know what the current share price is? What a good question, and one that should be directed to someone within your company that would have this information - think the CEO or CFO. To strike the options you also need to sign some paperwork with these people, so it will definitely be good to start involving them in your decision making process anyways. The most important thing to remember here is that you will need to buy these shares - that means you will need some money! You can calculate how much you need to pay by taking the number of options you have and multiplying it by the exercise price in your contract. This is an important thing to consider, as this can be a sizable amount of money. We are currently exploring options financing - so if you need help here then feel free to reach out to us.
So you have options, they have vested, and you have the money set aside to exercise them. How good - you are now ready to strike those bad boys and turn them into shares - time to become a shareholder! This process is run by your company (or assisted by Pomelo if we are working with your company) so now you need to reach out to who is in charge of this process. Like we said before, in most instances this is the CEO or CFO. If you have already had some education with Pomelo, then feel free to reach out to us and we can assist you here as well!
Final point, sometimes schemes can have many different clauses. Sometimes these clauses can make it so you can only exercise options at a certain time, or other conditions. It's important to understand these conditions before exercising your options, because you may do all the steps before and realise you're not actually allowed to strike your options. Instead you can spend all that saved money on a PS5, so it's not all bad, but it's worth considering. Have a question on whether you can strike your options? Then reach out to us or your CEO - they should have the details!
Now with a few forms, some payments, a few handshakes, some high fives - now you're a shareholder! From eggs to chickens!
We love seeing employees become shareholders - and would love to hear your stories (if you have any) on how this process went for you? Was it good? What went bad? We want to make the employee equity experience the best it could be, so let us know so we can work on making this process much better!